Even with its inevitability, renewable energy is still plagued with financial uncertainty. Take Ohio’s Substitute Senate Bill 58 for instance, which seeks to modify the state’s mandate that 12.5% of electricity supplied to consumers be generated by renewable-energy resources by 2025, half of which must be generated within the state. Outside of Ohio, state-level renewable energy mandates were challenged in at least 29 states.
Renewable-energy developers also face challenges at the federal level. The Production Tax Credit (PTC), often relied on for wind-energy development, expired at the end of 2013. After years of repeated PTC extensions, it seems unlikely that Congress will again renew the incentive in the near future.
With regulatory uncertainty surrounding traditional government-supported incentives, renewable-energy developers increasingly examine alternative means of financing. A few include Real-Estate Investment Trusts and crowdfunding.
Real-Estate Investment Trusts
These trusts (REITs) sell like stock on the major exchanges and invest in real estate. REITs entities are treated as corporations for tax purposes, but are generally exempt from corporate-level income tax. To qualify, each REIT must payout at least 90% of its taxable income each taxable year in dividends to its shareholders.
To qualify as a REIT, a significant portion of the company’s assets and income must be related to real estate. Such “good income” includes rents from real property, real property gains, dividends and gains from investments in other REITs, interest on real estate, income from foreclosure property, and income from temporary improvements. However, it is unclear whether assets and income generated from clean-energy projects should qualify as “good income.” Without guidance from Congress, the Treasury Department, or the Internal Revenue Service, taking such a position would be risky.
To an extent, REITs are already investing in clean-energy projects through the use of a Taxable REIT Subsidiary (TRS). A TRS entity provides services to the REITs’ tenants without jeopardizing its status as a REIT because unlike its parent REIT, a TRS pays corporate income tax. For example, a TRS might be used to develop and own a distributed renewable-energy project and sell the power generated to the building’s tenants. Alternatively, a TRS might develop a distributed renewable-energy project and then sell it to an investor or utility.
Over the last few years, crowdfunding has gone from a novel way to fund a creative project to a serious fundraising mechanism. Crowdfunding, which stands for Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure, is a mechanism for raising funds from a large number of investors who usually participate in small amounts.
Crowdfunding usually takes one of two forms. The first is donation-based funding, which is the collective effort of individuals who network and pool their money, usually via the Internet, to support efforts initiated by other people or organizations. Unlike in the donation-based model, the second form of crowdfunding is the funding of a company by selling small amounts of equity to many investors. In this form of crowdfunding, individuals who fund become owners or shareholders and have a potential for financial return.
The latter form of crowdfunding was enabled by the Jumpstart Our Business Startups Act, and signed into law by President Obama in April, 2012. Prior to its passage, the small pool of then-existing crowdfunding sites were only permitted to operate on a reward or donation basis, essentially offering a product, discount, or enticement in exchange for monetary funding. It is estimated by the firm, Massolution, that the crowdfunding industry raised about $6 billion in 2013.
Crowdfunding is increasingly being used as a vehicle for investment in renewable-energy projects. In January 2013, Mosaic introduced a crowdfunding platform that makes it possible for small, non-accredited investors to earn interest by financing clean-energy projects. Since then, Mosaic reports that it has had over $5.6 million invested into projects through its platform, with over 2,300 investors in 44 states. Mosaic further reports that it has made 100% on-time payments with yields around 5.5% to investors and zero defaults to-date.
In addition to well-known crowdfunding platforms, such as Kickstarter and Indiegogo, a number of platforms, such as GreenFunder and SunFunder, are focused specifically on providing crowdfunding opportunities for renewable energy and other cleantech projects. However, until the Securities Exchange Commission (SEC) issues final crowdfunding rules, likely not until late 2014, the viability of this mechanism for fundraising remains uncertain. Among other things, the SEC’s crowdfunding rules may set the standards for exempt crowdfunding offerings to non-accredited investors and establish dollar limits on an investor’s financial position. WPE
For further reading please see 26 U.S. Code § 856(c) or www.bricker.com.